Sun storage grows cold

Sun Microsystems has delayed its high-end data storage product line
nine months, at a time when competitors are becoming increasingly
active.

The high-end storage products that Sun acquired from Encore will be
delayed at least nine months, from the first quarter of 1999 to the
beginning of 2000, Sun said in a filing
with the Securities and Exchange
Commission.

The delay was the result of "increased complexities associated with the
completion of the product," Sun said in the filing. So far, Sun has spent
about $19 million of the $30 million total research and development needed
to complete the products, Sun said. Sun acquired Encore in July 1997 for $85
million.

The Encore products form the basis of Sun's A7000 product line, which is designed to give Sun a high-end storage product that can connect to
mainframe computers, Sun servers, and servers from other manufacturers.

Meanwhile, competition in this space has heated up.EMC, the dominant company in the sector, has
pledged to become increasingly competitive in light of Hewlett-Packard's decision last week to put
its emphasis on selling Hitachi Data
Systems high-end storage systems instead of EMC's products.

"It must be disappointing to Sun not to be able to reap the rewards of
their investment in the A7000, because they were trying very hard to," said
Aberdeen Group storage analyst David
Hill. "It now exposes them to greater competition from EMC and HP."

Writing the storage systems' software, or "microcode," which enables the
devices to connect to so many different servers, is a difficult task, Hill
said. "Creating 'mainframe' microcode that also applies to the open
systems arena is extremely difficult. For example, StorageTek's Iceberg, a good product
now being sold by IBM, was delayed for
more than two years because of microcode difficulties."

The delay is "particularly important from the point of view of some of the
competition in the industry, particularly EMC," said Goldman Sachs financial analyst
Laura Conigliaro. However, she added that Sun is doing quite well in
"Sun-attached storage"--storage that connect just to Sun's own servers.

"If it weren't for the fact that Sun is doing really well, you'd have to
conclude that is not a healthy [situation]. But look at the rest of
Sun: It really is thriving," Conigliaro said.

The delays in the Encore products "has resulted in a net shortfall from the
company's original projections of approximately $40 million," according to
Sun's filings. Nonetheless, the shortfall "does not reflect any offsetting
benefits the company may have achieved from its overall business plan,
including those resulting from a reallocation of resources among
alternative development projects," Sun said.

Data storage is a critical part of servers, particularly as companies add
high-powered server systems that must remain up at nearly all costs. When a
company buys a new server and storage system, "in many cases storage is
more than 50 percent of the revenue and profit" for the seller, Giga Information Group analyst Colin
Rankine has said.

Sun is finding more customer demand for its Sun-specific A5000 storage
system than the multiple-server A7000, Jeff Allen, vice president of
marketing for Sun's network storage division, said in an interview last week.

"We're finding that customers...don't all want to run Sun and HP together
at the same time. Demand is pulling us more to homogeneous environments,"
Allen said.

Also in its SEC filing, Sun said fault-tolerant computers based on Sun
chips are scheduled to arrive this quarter. The systems, based on
technology from a company called IMP that Sun acquired in 1996, were
delayed from a scheduled debut late in 1997.

Sun expected to need to spend $24 million to complete research and
development on the IMP systems, but Sun raised that total to $30 million.
So far $27 million has been spent, Sun said.

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